While ESG investment is seeing exponential growth, how can investors best identify genuinely beneficial ESG investments and avoid so-called greenwashing? Here, Newton1 head of sustainable investment, Andrew Parry, considers the options.
"If you are open and honest about commitment to responsible investment, you have to be prepared to talk about the negatives of your business. It is only by being honest and open about these downsides that you can tackle them and transition to a more sustainable way of doing things."
Never before has there been so much interest in corporate sustainability. Despite the unfolding pandemic crisis in early 2020, ESG and sustainable-labelled equity funds saw record inflows in the first quarter of the year,2 against a backdrop of environmental and social concerns.
Yet behind this – and despite wide and ongoing efforts to create common standards across ESG investing – problems remain. The quality of data, research and analysis on the market varies widely, it can be difficult to precisely define how much value responsible investment adds to portfolios and the different approaches to ESG and the use of different terminologies across the industry can confuse investors.
The large volume of standards and reporting organisations in this space adds to the challenge. The Global Reporting Initiative, the Climate Disclosure Standards Board, the International Reporting Council and the Sustainability Accounting Standards Board are all aimed at standardising what constitutes sustainable, ESG and 'green'.
Grey areas such as this can fuel fears of so-called greenwashing – conveying a false impression about the environmental soundness of a company's products and services in order to attract investment. Newton head of sustainable investment Andrew Parry acknowledges the problem but hopes the growing enthusiasm for sustainable and ESG investment will ultimately help as investors seek clearer data and information on their underlying investments.
"The growing demand for sustainable products provides an opportunity for companies to demonstrate ESG is not a handy marketing acronym for asset managers, but an integral part of how a company takes its corporate purpose seriously to generate value for all stakeholders," he says.
"The Global Reporting Initiative, the Climate Disclosure Standards Board, the International Reporting Council and the Sustainability Accounting Standards Board are all aimed at standardising what constitutes sustainable, ESG and 'green'."
Nevertheless, whether it is mining companies making claims about their ethical stance or fashionable clothing companies touting their position against climate change while relying on cheap labour or worse to produce their clothes, Parry acknowledges there are issues with establishing the commitment of some corporates against their apparent ESG credentials. Language and definitions in this area, he adds, remain both confusing and problematic.
"Greenwashing is a challenge and we need a clear language to talk about it. People have different interpretations of what ESG means. Greenwashing is an accusation directed at companies, not just asset managers keen to virtue signal. ESG should never be just about what a company is disclosing, but what it is actually doing."
Parry adds that, wittingly or unwittingly, rating agencies monitoring responsible investment are also contributing to the confusion around standards, producing conflicting metrics and ratings that allow less scrupulous corporate to 'game' the system in their favour by appearing to have high scores for their ESG awareness and adoption.
As companies looking to get good ratings by publishing more and more data in order to get a good score, there is a danger such ratings become little more than a label or, worse, a box ticking exercise, he adds.
"Part of the problem is the quality of data. As middle men, the rating agencies do have something of a stranglehold on data and can sometimes have a vested interest in normalising data," he says.
"We are all trying to find better, more transparent ways to report activity. It is not just about everyone trying to claim their virtue – which there is too much of in Europe – but it is finding a better way to be transparent in what companies and investment managers can report. This would give clients a better understanding of exposures in their portfolios so they can then make better, more informed choices."
More useful, Parry believes, is a deep, warts and all analysis of business practices, honestly engaging and assessing the underlying impacts across the ESG spectrum, rather than just relying on potentially spurious or misleading ratings, can be helpful in establishing a business's true ESG impacts and commitments.
Parry says: "One of the easiest ways to spot greenwashing is when you find companies won't talk about the negatives involved in aspects of their business, only the positives. The reality is that measures such as the UN's Social Development Goals only exist because there are a whole series of environmental and social deficits they were designed to tackle.
"If you are open and honest about commitment to responsible investment, you have to be prepared to talk about the negatives of your business. It is only by being honest and open about these downsides that you can tackle them and transition to a more sustainable way of doing things," he concludes.
- SA BNY Mellon Investment Management company
- Morningstar. Despite the Downturn, U.S. Sustainable Funds Notch a Record Quarter for Flows. 09 April 2020
For Professional Clients only. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes. For further information visit the BNY Mellon Investment Management website. www.bnymellonin.com